The 5 Financial Steps to Take Before Year End
What financial decisions are you making as we close out 2021?
There are less than 20 days in the year. These are 5 steps I am taking right now before the year ends to set myself up for a more successful 2022. This includes some last minute savings opportunities and setting up my 401k contributions to start 2022 in “Budgeting Hard Mode”.
Step 1: Check the balances of your FSA, Gym Perks, or other “use it or lose it” accounts.
Fitness Benefits: For 2021 Meta offers $720 in reimbursable for fitness related spending. With work from home the number of items covered has expanded dramatically (to now include equipment and Oculus devices). Always good to check to see if there were any changes to your company perks this past year.
FSA: This is a little different this year. Normally you can only roll over ~$500 but for 2021, 2022 the IRS has released new guidance allowing for the full balance to be rolled over. This is up to the employer to implement and they may still have the same limit, make sure to check (Meta is rolling over up to $1,000).
Vision Benefits: Within the Meta vision plans is the option to reimburse for Sunglasses. The easiest way I have found is to log in via your VSP account on https://eyeconic.com/
Other Reimbursements: Does your employer reimburse your internet costs? During mandatory work from home Meta will reimburse you $75 per month. You need to submit a receipt so it is a good time to look back to see if you missed a month.
Step 2: Look for investment opportunities that are tied to the calendar year.
Backdoor Roth IRA: It might be too late to make adjustments to this years 401k but you can still contribute to a Back Door Roth (please don’t do this if you have a traditional IRA with a balance, it will lead to a pain in the ass other wise known as the Pro Rata Rule). You can contribute $6,000 in 2021.
iBonds: With high inflation also comes higher interest rates on iBonds. Currently paying 7% APR over the next 6 months. The simple way to think about iBonds is to assume you will get the guaranteed rate for 6 Months and then 0% for the next 6 months. With a limit of $10k per year that means $350 in interest (10,000 x .07 / 2). There is a penalty for selling prior to 5 years of 3 months of interest. So… if you hold it past the 9 month mark you earn $350 or >4.5% while also being exempt from state taxes which can increase the effective rate even more. The limit is $10k per SS# per year. So you can get $10k now and $10k next month per person. Beats most savings rates today, only downside is the need to deal with the 1995 Treasury Direct website.
Consolidate Savings Accounts: Honestly, interest rates are garbage. Make sure you are getting slightly less garbage on the cash you are holding. Ally, Marcus both have >=0.5%, nothing to write home about but better than 0.
Step 3: Estimate your tax bill.
For those with W2 incomes you have only 1 paycheck left. You can use this information and a tax calculator to see whether you will owe or receive a refund come April 2022. Here is a good calculator for California, Washington, Texas, New York (where most my subscribers are from). This is just a rough estimate but will save you from a big surprise when you finally do complete your taxes. For many employees with large portions of your income coming from RSU vests the first year tax bill can be a big surprise (only 22% of each vest is sold for tax purposes while many will be in higher brackets). If you want to make this less painful next year you can update your W4 with your employer. Feel free to email me if you need more help here and I can walk you through it.
Step 4: Update your 401k contributions for 2022.
If you are already maxing out your 401k and After-Tax (if available) it would be good to double check that it will still be the case for 2022 with the increased contribution amounts. If you are not yet maxing out your 401k think through whether you can flex in 2022 and increase things by a few % (at the very least bump up the % that comes from your bonus, this will make it easier to stomach). If you really want a challenge consider what I call “Budgeting Hard Mode”. This is where you increase your contributions to the point where all your paychecks will be $0 until you max things out. Please only do this if you have a good buffer already to budget, it can be a big stretch to go months without income. I cheat here by having $0 paychecks while keeping some of my partner’s income coming in (dual income really can be a savings cheat code).
Step 5: Start Budgeting and Tracking Investments!
If you don’t currently budget now is the absolute best time to start. Having things set up and ready to go from day one of 2022 will make sticking to things that much easier. Remember, budgeting is just adding logging to your life in the same way you would add logging to your software projects to understand their performance. Do your future self a favor and use some of the next few weeks to get things setup, I am currently using a few tools here that range from free to paid.
YNAB: You Need a Budget: The most intentionally manual budgeting tool I use. It forces you to assign every single dollar in your account to a job. This helps me quickly identify saving opportunities. They just increased their prices though, now costing $98.99 per year. They offer a 34 day free trial to go through a full monthly cycle. I’ll get a free month if you signup with that link.
Personal Capital: One of the best investment trackers I have found. Lots of advanced retirement projections and ways to look at all your investments in a single place. Best of all it is free! You will get the occasional sales call to try and upsell you to a managed account but I have been very happily utilizing the free tools since 2013! We both get $20 with the included link.
Mint: Mint revolutionized the online personal finance game when they first came out. I have had an account since 2009. Unfortunately they have not seen much development since being purchased by Intuit in 2009. I am still using it for historical purposes. Good for basic tracking but not very strong budgeting tools.
Quicken: I have started using Quicken for > 1 year so far. Be on the look out for promos, I paid $40 for a year. I am really liking it. It has largely become my goto source for day to day full overview of budgets, investments, savings.
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Ok, that was all high level steps. Here is exactly what I am doing:
I picked up a pair of sunglasses off Eyeconic which my VSP covered the full cost other than $21.48 to cover the taxes. I still have $60 in wellness benefits to use (or likely dig through past purchases to find eligible purchases). I am under the FSA roll over limit so all remaining funds will still be there for me to use in 2022.
I still need to fund my Traditional IRA and then Roll it over into a Roth (backdoor roth) for $6,000. I am also going to try and rolling over my partners traditional IRA into her current employers (Uber) 401k. This will make it so we can also do a back door roth for her. I purchased $10,000 in iBonds in November and am still debating whether to purchase $10,000 more in my wife’s account. The rest of my cash is sitting with hmbradley.com at 3%, however they are not accepting any new accounts at the moment.
Have been getting better and better each year at not being surprised by the tax bill. Timing wise tax time lines up with H1 bonus payouts and the first equity vests of 2022 which I use to cover 2021 tax under-withholdings
Going through an updating contribution to try “Budgeting Hard Mode”. I’ll update the numbers prior to any bonus payouts but am limited by the plan not allowing the total %’s to be >175% and non-bonus total % no greater than 75%. Also updating my partner’s settings to similar effect although the rules around contribution %’s are different.
Since I already budget, January is the month where I update all spreadsheets and projections. Also known as “Spreadsheet day”, one of the happiest days of the year. Thinking through which budgeting programs I want to test out, CoPilot has been getting some good buzz in many FinTech circles but I don’t have a strong perspective on the value just yet.
Do you need help getting started on your FIRE journey? Send me an email/comment/dm with any questions you have. Bonus points if you include a snapshot of your budget.